If you can’t afford to repay your debts when they are due or your assets or worth less than your debts, this means you’re insolvent. If you’re in this situation, you might be very worried about your financial future but it’s important to remember there’s always a way out of problem debt. There are debt solutions designed to help that you should look into.

An Individual Voluntary Arrangement (IVA) and bankruptcy are two solutions that aim to help people who are insolvent, but how do you know which is better? What can happen if you start either solution? We’ll take a look at the pros and cons of IVAs and bankruptcy, so you can make an informed decision about which is right for you.

Get the right advice

Although this article is designed as a guide to help you understand the difference between the solutions, it’s not a substitute for speaking to a trained debt advisor. They will be able to tell you which solution is actually right for your situation.

A debt advisor will look at your finances in careful detail, making sure that they account for all your outgoings and incomings. They can then see how much Disposable Income you have to put towards your debts. They’ll also look into other aspects of your life, including past actions and future aspirations, and make an expert recommendation as to which solution is right for you.

How does an IVA work?

An Individual Voluntary Arrangement (IVA) might be more suitable for your situation if you own your own home. You may have to attempt to release equity from your home six months before the end of your IVA, but you won’t ever lose it. You won’t be expected to release more than 85% of the value of your home and there are some situations when a remortgage would not be required – this will all be explained by your advisor. If you can’t remortgage and put the equity into the IVA, your plan will be extended for up to another 12 months.

With bankruptcy, you may have to sell your home if your interest in the property is £1,000 or more, and there isn’t a specific reason why you have to live in that particular house or area.

If you started an IVA, your solutions provider will need details of your other assets too – they wouldn’t necessarily have to be included in an IVA but they would be with bankruptcy.

An IVA is a suitable option to consider if you can put something towards your debts each month but you’re not able to repay all your debts. This is because an IVA normally lasts between five and six years and after that time, as long as you’ve stuck to the rules of the arrangement, the rest of your unsecured debts on the plan are written off.

There are fees associated with this solution once it’s up and running, but these will come out of your monthly payments towards your debts, they won’t be added on top of what you have to pay. Unless you find yourself in a position where you can pay the debt in full because you’re received a large sum of money. For more information about how these are worked out, click here.

Once the solution has finished, you’ll be able to rebuild your finances free from the worry of unmanageable debt.

How does bankruptcy work?

On the other hand, your debt advisor might recommend bankruptcy to you instead. While this option is normally considered to be a last resort in terms of solving debt problems, in some situations it can be the best thing for you to do.

Bankruptcy only lasts a year, in comparison with the five to six required to complete an IVA. If your Trustee – the person overseeing your bankruptcy – can see that you can afford it, you will have to pay something each month, known as an Income Payment Agreement. There are some cases where you don’t have to pay towards your debts with bankruptcy, but there are guidelines in terms of what creditors expect you to be paying towards the different areas of your life. There are some items that might be seen as acceptable on an IVA that might not be allowed at all with bankruptcy, such as satellite TV packages.

There is a cost to going bankrupt. You can only apply for bankruptcy online and the application can’t be processed until the whole fee has been paid. It costs £680 to go bankrupt and this is split between an adjudicator fee of £130, and an administration fee of £550. You can find more info about the cost of bankruptcy here. In Northern Ireland the fee is £647, and this is split between a court fee of £115, a bankruptcy deposit of £525 and a solicitor’s fee of £7.

When the bankruptcy ends, your unsecured debts are written off so you can rebuild your finances free from unmanageable unsecured debts.

Are there downsides to these solutions?

There are downsides to both these solutions. They’ll both have a negative effect on your credit history for a minimum of six years. If your IVA happens to last longer than six years, it will remain on your credit file for as long as the IVA goes on for.

This means that service providers and lenders that credit check you in the future, will be able to see the solution and that you’ve had problems repaying your debts in the past. This may go against you when applying for credit or services, and if you are approved, it may have to be at a higher rate of interest. Damage to your credit file applies to any debt solution that you may start.

When it comes to bankruptcy and IVAs it’s unlikely that your job will be affected, but there are some roles that will be incompatible with both solutions. Both solutions deal with insolvency and some employers have rules against their employees being insolvent. These roles tend to be positions of authority like, being a police officer, judge or prison officer or in the financial sector, like being an accountant, solicitor or director of a limited company or bank manager.

You don’t need to worry about this too much – when you speak to your debt advisor they will flag up any concerns they have about your job and the solutions you’re considering. If there’s a strong chance that it will affect your employment, they’ll recommend a more suitable option for you. They’ll always take into consideration what you’re doing at the moment and your future career aspirations.

Are there other options?

There is a third solution to deal with insolvency – a Debt Relief Order (DRO). This is only suitable for people with few assets and who can’t afford to pay anything towards their unsecured debts.

To qualify for a DRO, you’ll need to owe less than £20,000 and have less than £50 Disposable Income (DI) each month. This is how much you have left after you’ve covered all of your essential bills and expenses. You also can’t be a homeowner and you’ll need a total of less than £1,000 in assets. Your car is separate from this – this can be worth up to £1,000.

It’s a good idea to get professional debt advice when you’re considering any debt solution. Now you have an overview of the different options to help with insolvency, you should contact a debt advisor for further help and information.

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